Risk Management Introduction : Banks in the financial services industry are facing various challenges attributable to increased competition

and expansion of diversified business network. With a view to managing various risks in a prudent manner, scheduled banks are hereby follow `Risk Management uidelines for Banks! issued by Bangladesh Bank vide "#$ %ircular &o'() dt. *+,(),*). Bangladesh Bank advised the banking industry to identify the risk factors associated with their business and to take effective measures in the financial process to minimi-e and control the risks in the area of lending, internal control, li.uidity and treasury management. Risk management guidelines should be treated as supplement to, and not a substitute for, existing core risks guidelines. Banks have to prepare a risk management paper and must place the same in the monthly meeting of the Risk Management /nit. 0he minutes of the meetings should contain specific decisions based on the analysis,recommendations made in the risk management paper. Banks have to submit risk management papers 1hard 2 soft copies for successive months of each .uarter3 along with the minutes of the meetings within *( days of each .uarter end to the "epartment of #ff'site $upervision. Bangladesh Bank has already issued sets of guidelines for capital ade.uacy in accordance with Basel 44, including stress testing, and there are the mandatory %ore Risk uidelines which are 5 i. 4nternal %ontrol and %ompliance Risk ii. 6oreign 7xchange Risk iii. %redit Risk iv. 8sset 9iability Management Risk v. Money 9aundering Risk vi. 4nformation 2 %ommunication 0echnology $ecurity Risk Definition of Risk : Risk is the possibility of something unusual, unexpected or adverse happening. Risk is the potential to loose assets by an unexpected event. Definition of Risk Management: Risk Management is a process to identify, evaluate,measure, control and monitor ma:or risks inherent in banking business. Objectives of Sound Risk Management 5 0he ob:ectives of a sound risk management is to identify and analy-e risks and manage their conse.uences. Principles of Sound Risk Management : *. Organizational Conte t: 7very organi-ation is affected to varying degrees by various factors in its environment 1;olitical, $ocial, 9egal, and 0echnological, $ocietal etc3. ). Involvement of Stake!olders: 0he risk management process should involve the stakeholders at each and every step of decision making. 0hey should remain aware of even the smallest decision made. <. Organizational Objectives: When dealing with a risk it is important to keep the organi-ational ob:ectives in mind. 0he risk management process should explicitly address the uncertainty. 0his calls for being systematic and structured and keeping the big picture in mind. =. Reporting: 4n risk management communication is the key. 0he authenticity of the information has to be ascertained. +. Roles and Responsibilities: Risk Management has to be transparent and inclusive. >. "arl# $arning Indicators: ?eep track of early signs of a risk translating into an active problem. 0his is achieved through continual communication by one and all at each level. @. Revie% C#cle: ?eep evaluating inputs at each step of the risk management process ' 4dentify, assess, respond and review. A. Supportive Culture: Brainstorm and enable a culture of .uestioning, discussing. 0his will motivate people to participate more. B. Continual Improvement: Be capable of improving and enhancing risk management strategies and tactics. &uidelines on Managing Core Risk in banking: Bangladesh Bank issued the `Risk Management uidelines for Banks to provide a structured way of identifying and analy-ing potential risks and devising and implementing responses appropriate to their impact. 0his guidelines includes policies and procedures for risk management activities. Policies : *. "esigning organi-ational structure of Risk Management /nit 1RM/3 ). 6ormulation,7stablishing overall risk assessment and management policiesC <. Reviewing and updating all risks on a systematic basisC =. $etting portfolio ob:ectives and tolerance limits,parametersC +. $etting and establishing strategies and different modelsC >. "eveloping information system,M4$ inflow process and data management capabilities. Risk Management Process : *. %ollecting all relevant data from different models and information systemC ). 8ssessing the .uality, completeness and correctness of all relevant dataC <. Dighlighting risky portfolios and deficienciesC =. 8naly-ing data,information through preparation of paper, +. 4dentifying, evaluation,measuring, controlling and monitoring ma:or risks, >. Reviewing market conditions and taking precautionary measuresC B. 8naly-ing the bankEs own resilience capacityC *(. 0aking necessary steps to bring the position within limit and also assess and measure volatility of market and vulnerability of investment. Risk Measurement' Monitoring ( Management Reporting S#stem)

Risk *ppetite : Risk appetite is the level and type of risk a bank is able and willing to assume in its exposures and business activities, given its business ob:ectives and obligations to shareholders. 4t is stated in terms of the potential impact on profitability, capital and li.uidity. Risk Management +nit : a) Risk Management Committee Banks should have a Risk Management %ommittee headed by %7# and M" . $enior executives will be the members of the committee. %ommittee will meet monthly meeting. b. Risk management sub'committee 5 Bank should have different sub'committees to assess and mitigation the risk in six core risk areas. c. %redit %ommittee Role ( Responsibilities of t!e ,oard and Senior Management: a. "efining the risk appetite. b. "esigning the organi-ational structure to manage risk within the bank. c. /nderstanding the inherent risks of the bank. d. Reviewing and approving risk management policies and re'reviewing at least annually. e. 7nforcing and using ade.uate recordkeeping and reporting systems. f. Reviewing and approving limits and re'reviewing at least annually. g. Monitoring compliance with overall risk management policies and limits. Capital Management : a. 0o define the goals of capital management b. 0o prepare a set of policies and internal rules with regard to capital management. c. 0o integrate capital management into the bank!s strategic plan. d. 0o review the policies and specific measures for developing and establishing an ade.uate capital management system. e. "isseminate the capital management policies throughout the bank. f. 0o analy-e present as well as future capital needs of the bank and adopt suitable capital raising methods. g. 0o ensure consistency of the capital management system, with the bank!s risk profile and the competing business environment. h. 0o set an appropriate level of capital target for the short'term, medium'term and long'term and develop a capital plan to achieve the target. Stress -esting $tress 0esting is a risk management techni.ue used to evaluate the potential effects on an institution!s financial condition of a specific event and,or movement in a set of financial variables. 4t measures the shock absorbing capacity of the bank. $tress 0esting shows the effect of shock on capital ade.uacy. $tress 0est ascertains the magnitude of shock in different areas as under5 *. ). <. =. +. %redit Risk 4nterest Rate Risk 7xchange Rate Risk 7.uity ;rice Risk 9i.uidity Risk

Farious Risk factors if turn into reality then what would be the impact on Banks %apital. 0hree $hocks are anticipated 5 1i3 1ii3 1iii3 Minor $hock Moderate $hock Ma:or $hock

Parameter of Different s!ocks : $l.& o *. Risk 6actor %redit Risk5 4ncrease in &;9s 4ncrease in &;9s due to default of top ten large borrowers 6all in the forced sale value of mortgage collaterals &egative shift in the &;9s categories 4ncrease of &;9s in particular ) sectors 4nterest Rate Risk 1change in interest rates3 7xchange Rate Risk 1change in exchange rates3 7.uity ;rice Risk 1fall in the stock market index 3 9i.uidity Risk 1excess of bank!s normal withdrawal3 Minor $hock <G < borrowers *(G +G <G *G +G *(G )G Moderate $hock BG @ borrowers )(G *(G BG )G *(G )(G =G Ma:or $hock *+G *( borrowers =(G *+G *+G <G *+G =(G >G

). <. =. +.

.i/uidit# Risk Management 9i.uidity ;olicy, ;rocedure 2 9imit

9i.uidity Management $tructure 9i.uidity Risk Management ;rocess M4$ , ;eriodic Review %ontingency 6unding ;lans Operational Risk Management #perational risk is defined as the risk of unexpected losses due to physical catastrophe, technical failure and human error in the operation of a bank, including fraud, failure of management, internal process errors and unforeseeable external events. Operational Risk Operational strategic risk 0he risk of choosing an inappropriate strategy in response to environmental factors, such as ;olitical overnment Regulation 0axation $ocietal %ompetition, etc. Operational failure risk 0he risk encountered in the pursuit of a particular strategy due to ;eople ;rocess 0echnology

#perational Risk Management ;rinciples #perational Risk Management 6ramework Risk Monitoring Reporting %ontingency ;lanning Strategic Risk Management ;olicies, ;rocedures 2 9imit 4dentification, Measurement 2 Monitoring M4$ Board #versight $enior Management #versight $trategic ;lan $trategic risk is the current or prospective risk to earnings and capital arising from adverse business decisions, improper implementation of decisions, or lack of responsiveness to changes in the business environment, both internal and external. $uch factors include5 a0 Competition: 8 strategic plan and business plan must be in line with current and anticipated future competition. %ompetitive factors must be taken into consideration in the bankEs pricing practices and when developing new products. b0 C!ange of target customers: %hanges in demographics and consumer profiles may affect the customer base, earnings and capital funding of a bank. c0 -ec!nological c!anges: 8 bank may face risks from changing technology because its competitors can develop more efficient systems or services at lower costs. 0he bank should ensure that the level of technology in use is sufficient to retain its customer base. d0)))"conomic factors: lobal, regional or national economic conditions affect the level of profits of a bank. 0hus, continual assessment and monitoring of economic trends and forecasts are needed. e0 Regulations: %hanges in laws and regulations of the supervisor, tax authorities, local authorities and other authori-ed agencies may affect the implementation of strategic and business plans established to meet the bankEs goalsC and may re.uire ad:ustments to the plans in order to ensure compliance. Compliance Risk Management %ompliance risk is the current or prospective risk to earnings and capital arising from violations or non'compliance with laws, rules, regulations, agreements, prescribed practices, or ethical standards, as well as from the possibility of incorrect interpretation of effective laws or regulations. Reputation Risk Reputation risk may arise from the possibility that negative publicity regarding the bank and its business practices, in the territory or elsewhere through related entities, and whether accurate or not, will adversely impact the operations and position of the bank. Mone# .aundering Risk Mone# laundering is the process whereby the proceeds of crime are transformed into ostensibly legitimate money or other assets. H8 definition of what constitutes the offence of money laundering under Bangladesh law is set out in $ection ) 10ha3 of the ;revention of Money 9aundering 8ct )(() 18ct &o. @ of )(()3 which is reads as follows5 IMoney 9aundering means5 1*u0 ;roperties ac.uired or earned directly or indirectly through illegal meansC 1*a0 4llegal transfer, conversion, concealment of location or assistance in the above act of the properties ac.uired or earned directly or indirectly through legal or illegal meansCI Management *ction : 1i3 Management fully understands the aspects of 8M9 risk and exhibits strong commitment to complianceC

1ii3 When deficiencies are identified, management promptly implements meaningful corrective actionC 1iii3 0he Board has approved an 8M9 compliance program that includes ade.uate policies, procedures, controls, and information systemsC